The threat of future funding shortfalls. First although it is widely recognized that external financing can be costlier than internal financing thereby implying that the quantity of new investment can be sensitive to the.
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Guthrien abstract we analyze the dynamic investment decision of a rm subject to an endogen ous nancing constraint the threat of future funding shortfalls lowers the value of the rm s timing options and encourages acceleration of investment beyond the rst best optimal.
Investment uncertainty and liquidity. Investment liquidity and financing under uncertainty patrick boltony neng wangz jinqiang yangx december 3 2013 abstract this paper considers a model of irreversible investment under uncertainty for a rm facing external nancing costs. Investment uncertainty and liquidity. Although greater uncertainty about project value increases the va lue of investment delay and lowers current investment greater uncertainty about firm liquidity has the opposite effect.
Such a rm prefers to fund its investment through internal funds so that the rm s optimal investment. Request pdf investment uncertainty and liquidity we analyze the dynamic investment decision of a firm subject to an endogenous financing constraint. These results can potentially help explain observed empirical relationships between investment and liquidity investment and uncertainty investment and hedging and shareholder wealth and volatility.
Introduction despite extensive research the exact nature of the dependence of corporate investment on firm liquidity uncertainty and hedging policy remains obscure. For helpful comments we are grateful to louis ederington john handley jayant kale peter mackay john powell and seminar participants at otago melbourne and the 2002 new zealand finance. Investment uncertainty and liquidity 1.
Such a rm prefers to fund its investment through internal funds so that the rm s optimal investment policy and value now depend on. Investment uncertainty and liquidity glenn w. Investment liquidity and financing under uncertainty patrick boltony neng wangz jinqiang yangx april 15 2014 abstract we develop a model of investment under uncertainty for a rm facing external nancing costs.
Despite extensive research the exact nature of the dependence of corporate investment on firm liquidity uncertainty and hedging policy remains obscure. Early work on the. More volatility in the firm s future cash flow distribution raises the risk of future funding shortfalls thereby lowering the value of waiting and increasing.
Moreover hedging is useful not only because it allows investment to proceed but also because it allows investment to be delayed. Investment uncertainty and liquidity 2145 uncertainty are likely to incorporate both types of volatility so our model sug gests one reason why empirical research finds little or no short term relationship between investment and uncertainty 3 our paper builds on a long tradition in finance research. Boyle is at the university of otago and guthrie is at victoria university of wellington.
Boyle and graeme a. First although it is widely recognized that external financing can be costlier than internal financing thereby implying that the.
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